International Economics Update
Sep 2002
Copyright (C) 2002 The International Economics Network
http://www.internationaleconomics.net
Marginal Notes.
A Tale of Two Theories
International relations today increasingly seems to lean towards caricatures of a world where countries are either hurtling towards an epic "clash of civilizations", or gradually converging towards a uniform "end of history". Those subscribing to the beliefs of the former - as has been emphasized time and again in the Western media - assert that
"...the fundamental source of conflict in this new world will not be primarily ideological or primarily economic. The great divisions among mankind and the dominating source of conflict will be cultural. National states will remain the most powerful actors in world affairs, but the principal conflicts of global politics will occur between nations and groups of different civilizations. The clash of civilizations will dominate global politics. The fault lines between civilizations will be the battle lines of the future."
Those entrenched in the latter school of thought draw from the placid but inevitable march of Hegelian dialectics, trumpeting instead that
"...liberal democracy may constitute the endpoint of mankind's ideological evolution and the final form of human government, and as such constitute[s] the end of history... there would be no further progress in the development of underlying principles and institutions, because all the really big questions had been settled... we are now at a point where we cannot imagine a world substantially different from our own."
This leads one to question whether the state is an artifact of institutional history; alternatively, the converse can be questioned: how can the state be relevant in this increasingly globalized world? After all, globalization is a siren song, promising rapid economic development together with the attendant benefits of modernity. To take the argument a step further: does it even make sense to formulate a theory of the nation state in the modern world?
Clearly, such strong ideological stances hark well in academic discourse, where intellectual differentiation is the rule of the day. More practically, however, the answer will probably lie faintly etched somewhere between these polar extremes of interpreting the world. A more moderate opinion has been propounded by Ohmae (1995, pp. 8-16), and is best captured thus:
"Public debate may still be hostage to the outdated vocabulary of political borders, but the daily realities facing most people in the developed and developing worlds - both as citizens and as consumers - speak a vastly different idiom. Theirs is the language of an increasingly borderless economy, a true global marketplace... the traditional nation states [have begun] to come apart at the seams... in economics as in politics, the older patterns of nation-to-nation linkage have begun to lose their dominance... [T]he uncomfortable truth is that, in terms of the global economy, nation states have become little more than bit actors. They may originally have been... independent, powerfully efficient engines of wealth creation. More recently, however, as the downward-ratcheting logic of electoral politics has placed a death grip on their economies, they have become - first and foremost - remarkably inefficient engines of wealth distribution... [W]hat this combination of forces at last makes clear is that the nation state has become an unnatural - even a dysfunctional - organizational unit for thinking about economic activity. It combines things at the wrong level of aggregation."
What this suggests, then, is that far from becoming irrelevant, the state needs to aspire towards cogency in a world that constantly threatens to erode the basis for its existence. This will not occur if the state remains a passive actor - it is essential that it engage in policies that would guarantee its continued usefulness. Indeed, nation states that do not subscribe to an active, adaptive approach might find themselves increasingly marginalized, and rendered impotent in an increasingly borderless world.
Website Additions.
Other than the usual periodical updates in the news and research papers section, the 'International Economists & Education' section (http://www.internationaleconomics.net/economics5.html) has been updated to list a substantial number of international economists with webpages. Also, the section on 'Institutions, Think Tanks & Universities' (http://www.internationaleconomics.net/economics4.html) has also been updated to include a few new research bodies.
Interesting Readings.
1. The Importance of Being Earnest: Warren Buffet writes in the NYT ('Who Really Cooks the Books?', http://www.nytimes.com/2002/07/24/opinion/24BUFF.html) about the importance of expensing options - a theme that he has reiterated in countless Berkshire Hathaway annual reports, and currently being seriously considered in light of the accounting scandals rocking the U.S. corporate world. This is reinforced by academic opinion from Zvi Bodie, Robert S. Kaplan and Robert C. Merton ('Options Should Be Expensed', http://online.wsj.com/article/0,,SB1028160319109501560,00.html?mod=opinion). A somewhat dissenting view is provided by Daniel Gros ('No Options on Options', http://g.msn.com/0NL34064/4735)
2. Bubble, Bubble Toil and Trouble: What is this elusive concept called a bubble? Robert Bartley attempts to clarify this concept in the WSJ ('What's a 'Bubble' Anyway?', http://www.opinionjournal.com/columnists/rbartley/?id=110002086).
3. Finally, Fast Track: The U.S. will invest the powers of fast track trade onto its trade-ambivalent president. However, as the Economist argues, the battle against protectionism is far from over ('A step forward', http://www.economist.com/agenda/displaystory.cfm?story_id=1263795). Trade issues are also the focus of the Economist ('World trade talks', http://www.economist.com/agenda/displaystory.cfm?story_id=1302217).
4. Plumbing Works: IMF Research Director Ken Rogoff candidly discusses the challenges and realities facing the reformation of the international financial system, 60 years after Keynes and White first began its overhaul ('Managing the World Economy', http://www.imf.org/external/np/vc/2002/080302a.htm).
5. In the Shadow of the Almighty (U.S. Dollar): Stephen Jen (MSDW) argues for a unifying framework for currencies that reflect both asset and goods market fundamentals, using their shadow prices and market sentiment as predictors for the fair value of a currency ('Currencies: Multiple "Shadow Prices" of Currencies', http://www.morganstanley.com/GEFdata/digests/20020809-fri.html#anchor4). More on the U.S. dollar phenomenon (albeit a little delayed) by Philippe Bacchetta and Eric van Wincoop, writing for Project Syndicate ('Are the Dollar's Days Numbered?', http://www.project-syndicate.org/series/series_text.php4?id=930&lang=1).
Endnotes.
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